It’s been no secret that virtual currency has been in the crosshairs of the Internal Revenue Service (IRS) for some time. Virtual currency is one of the IRS “campaigns” and criminal investigations related to crypto have already started. The IRS has been sending taxpayers “educational” letters to remind them and warn them of their tax obligations when it comes to the use of virtual currency.
FBAR Reporting on the Horizon
With all of these initiatives in place, it makes total sense that the Financial Crimes Enforcement Network (FinCEN) will soon require that foreign accounts holding virtual currency must be disclosed on the Report of Foreign Bank and Financial Accounts (FBAR, Form 114). FinCEN has announced FinCEN Notice 2020-2, its intention to propose amendments to the FBAR regulations to include virtual currency. The Notice is copied in full below.
This change will likely impact many Americans who live overseas. Numerous Americans living and working abroad have found it difficult to maintain a bank account in their country of residence due to the infamous “Foreign Account Tax Compliance Act”, FATCA. The expat abroad may more frequently turn to virtual currency to handle payments as more and more goods and service providers are now quite happy to accept it. If the virtual currency is held in a “foreign” account, reporting on FBAR will be required assuming the general threshold requirement is met.
Per the FBAR instructions, a “foreign” financial account is a financial account located outside of the United States. For example, an account maintained with a branch of a United States bank that is physically located outside of the United States is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account.
Assuming regulations are issued by FinCEN with respect to virtual currency accounts, these regulations should provide guidance as to the “location” of the virtual currency account. Virtual currency exchanges are based both inside and outside the United States. Certainly, a relevant question would be where the virtual currency exchange is based. Bitfinex, for example, is a cryptocurrency exchange owned and operated by iFinex Inc., which is headquartered in Hong Kong and registered in the British Virgin Islands. By contrast, Coinbase, Binance and Kraken are US-based cryptocurrency exchanges. However, even US-based exchanges may have servers located abroad and as a result, it may not be possible for an account holder to know where his virtual currency is being held by an exchange.
The scope of the reporting obligations will need to be carefully drafted. For example, various options exist for users to hold virtual currency, including so-called “hosted” wallets and “un-hosted” (that is, user-controlled) wallets. Hosted wallets are “managed” by an exchange or other financial services entity. The entity itself holds the private key for those wallets. With a user-controlled wallet, the user maintains control of the private keys and a financial institution need not be involved.
Here is FinCEN Notice 2020-2, copied in full:
Report of Foreign Bank and Financial Accounts (FBAR)
Filing Requirement for Virtual Currency FinCEN Notice 2020-2
Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. (See 31 CFR 1010.350(c)). For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency). However, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.
For more tax information on virtual currency, check my blog post category devoted to the topic: virtual currency.
For those wanting to understand the difference among cryptocurrency, virtual currency and digital currency, here’s the scoop.
Keep your eye on this space for FinCEN updates with regard to virtual currency and FBAR reporting. You can subscribe to my tax blog at no cost and my weekly blog posts will be delivered to your inbox. This way, you won’t miss any posts. Just click the link below.
Posted January 14, 2021
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